Caterpillar (NYSE:CAT) dealers just reported that their engine sales in May spiked 21% from the previous year. Is it time to put this world leader in construction equipment into your portfolio?

Caterpillar makes construction and mining machines, builds and sells the engines that power them, and finances and insures their purchase and operation. And Caterpillar makes a hefty profit from all this. It generated $47.3 billion in revenue last year, up 32% from a year earlier, and $3.7 billion in profit, up 202%.

Moreover, in so doing Caterpillar has built up a $63 billion market capitalization, which is up 49% in the last year. The biggest financial risk for Caterpillar is its 2.34 debt-to-equity ratio of 2.34 — far above the industry’s 1.89.

Caterpillar’s recent spike in engine sales is compelling — but it masks a slowdown in growth over recent months and wide variations in growth by engine type. For example, Caterpillar’s total engine demand grew faster in February (31%), March (45%), and April (25%).

Moreover, growth by engine type in May indicates shrinking demand for some kinds of engines and rising demand for others. For example, sales were up for 45% for electric power, up 32% for industrial, and up 12% for petroleum — but down 27% for marine engines. This suggests that a slowdown in emerging markets — like China and India which use these engines for electric power and industrial applications — would be bad for Caterpillar investors.

So far in 2011, Caterpillar’s results have been tremendous. It first-quarter earnings jumped to $1.23 billion from $233 million a year earlier. Sales spiked 57% to $13 billion. Caterpillar also raised its forecast for 2011 earnings, projecting that they would exceed its previous record set in 2008.

But Caterpillar has had trouble earning enough to repay the providers of its capital. Although it’s again producing EVA Momentum (essentially, profit after deducting capital costs) of 7% — that represents an improvement over a bad 2009, with problems still remaining in 2010. That’s because Caterpillar had negative EVA in both years — $3.95 billion in 2009 and $1.69 billion in 2010.

Caterpillar’s price-to-earnings-to-growth ratio of 0.57 makes it look seriously undervalued (where 1.0 is considered fairly valued) — its P/E is 17.4 on earnings expected to climb 30.5% to $9.05 in 2012.

Caterpillar is a huge consumer of capital but if it keeps growing profit as quickly as it has recently, it should out-earn that cost of capital in the next year or two. If demand slows down in Asia though — look out below.

Peter Cohan has no financial interest in the securities mentioned.